Arch Coal Misses, Profits Fall - Analyst Blog

Arch Coal Inc. (ACI) posted a net income of 11 cents per share for the fourth quarter of 2009, below the Zacks Consensus Estimate of 16 cents and the reported net income of 44 cents per share during the same period last year. For the full year 2009, the company reported earnings of 42 cents versus the Zacks Consensus Estimate of 44 cents and the year-ago earnings of $2.45.

The company’s quarterly revenue declined 0.6% year over year to $725.5 million. Revenue in 2009 dipped 14% to $2.58 billion on lower sales volume and a lower average sales price due to the weaker economic and coal market conditions that prevailed during 2009.

Behind the Headline Numbers

During the quarter, Arch completed the acquisition of the Jacobs Ranch for $769 million and successfully completed its integration into Black Thunder. The company has already started realizing synergies from the combination. It expects to derive total synergies of $45−$55 million annually from the transaction.

In addition, the company signed a coal lease with Great Northern Properties Limited Partnership (GNP) to secure rights to mine coal resources owned by GNP in the Otter Creek tracts of southeastern Montana, gaining control of roughly 731 million tons of low-ratio, low-sulfur, sub-bituminous coal reserves in the northern Powder River Basin. These reserves are expected to support the future development of a large-scale, dragline-operated surface coal mine.

In the quarter, Arch Coal’s sales volumes increased 30.2% sequentially to 37.9 million tons, primarily due to the acquisition of Jacobs Ranch. Average selling price and operating costs in the quarter declined more than $2 per ton to $18.01 per ton and $13.86 per ton, respectively, reflecting a larger percentage of Powder River Basin production.

Sales volume in 2009 decreased 9% from last year to 125.0 tons due to planned volume reductions across Arch's operating regions, offset by the addition of Jacobs Ranch volume. Average selling price fell 2.0% because of lower price realizations on metallurgical coal volume in Central Appalachia as well as a larger percentage of Powder River Basin production.

Cash margin per ton in the quarter fell to $4.15 from $4.30 in the last quarter, while operating margin per ton fell to $1.83 from $1.86 in the third quarter of 2009. For fiscal 2009, cash margin per ton and operating margin per ton declined to $4.03 and $1.63, respectively.

In the reported quarter, Arch Coal sold 30.1 million tons of coal (up 40% sequentially) from the Powder River Basin, driven by the addition of Jacobs Ranch volumes, at an average selling price of $11.85 per ton (down 3.3% sequentially). Western Bituminous region sales volume amounted to 4.8 million tons (up 4.3%) at an average selling price of $29.38 per ton (up 1.0%). Sales volume totaled 3.0 million tons (flat sequentially) in the Central Appalachian region at an average selling price of $61.70 (down
1.2%) per ton.

At year-end 2009, Arch had available total liquidity of $691 million, consisting of cash on hand of $61 million and $630 million available under the company's short-term borrowing facilities. Total debt outstanding at December 31, 2009, was $1.8 billion, with a debt-to-capital ratio of 46%, compared with $1.3 billion in total debt and a 43% debt-to-capital ratio at December 31, 2008.

Looking Ahead

Management believes 2010 will be a transformative year for the coal industry. With expectations of a coal market recovery in 2010, the company expects annual sales volumes to be in the range of 145 million to 155 million tons. This includes projected sales of 4 million to 5 million tons of metallurgical coal.

Furthermore, the company has committed roughly 5 million tons of Powder River Basin coal for 2010 delivery at double-digit pricing on average and 3 million tons of Central Appalachian coal for 2010 delivery at prices 20% above the fourth quarter realized price in the region. The company has also committed 5 million tons of Powder River Basin coal for 2011 delivery at attractive pricing levels relative to the forward curve.

Based on expected production levels and sales commitments signed in the reported quarter, Arch now has uncommitted coal volumes of between 5 million and 8 million tons in 2010, 70 million to 80 million tons in 2011, and 100 million to 110 million tons in 2012. In addition, the company has 13 million tons of coal committed but not yet priced for 2010, and roughly 20 million tons committed but not yet priced for both 2011 and 2012.

Arch Coal has guided 2010 earnings, on a GAAP basis, to be in the range of 37 cents–86 cents. Adjusted earnings for 2010 are expected to be in the 50 cents−$1.00 range. It projects to spend $200−$220 million as capex in 2010, including reserve additions.

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